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Does Indexing Make Sense?

Hedge-fund indexing is controversial, but certainly has a place in the industry. However, the future of this niche market may depend upon its ability to generate respectable results over the long term.

AROUND THE WORLD, WELL OVER $10 BILLION is invested in hedge funds through index products. But not all indexes are created alike, and some critics say that indexing contradicts the purpose of hedge funds.

Like conventional stock indexes, hedge-fund benchmarks have different goals and can use different methodologies to track performance and thus come up with varying answers to the question of how much a market has moved or a strategy...